Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit‐Taking

What ties together the traditional commercial banking activities of deposit‐taking and lending? We argue that since banks
often lend via commitments, their lending and deposit‐taking may be two manifestations of one primitive function: the provision
of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large
balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities
can share the costs of the liquid‐asset stockpile. We develop this idea with a simple model, and use a variety of data to
test the model empirically.